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Sadove Outlines Turnaround Plan for Saks

What a difference two years can make.

What a difference two years can make. Since he took the helm as chief executive officer of Saks Inc. two years ago and chairman last year, Stephen I. Sadove has been credited with relaunching, rebuilding and rebranding financially, physically and emotionally one of the icons of American retailing.

During his keynote speech at the WWD Beauty CEO Summit, Sadove said a culture of change, innovation and leadership helped him, with his team, to turn the once-troubled retailer’s fortunes around.

“We created a very simple model that I use in running a company,” said Sadove. “This isn’t rocket science — it’s all about leadership and identifying what kind of a culture you want to have within a company,” he said. “To us, the most important factors are a culture that fosters and drives innovation, and fosters and drives and grows people. With those two things, if you have the right kind of innovation and you have the right way that you’re focusing on people, that then leads to the results.”

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It was a change that Sadove worked to put in place after being named Saks ceo in January 2006. Prior to joining Saks (he had joined the retailer’s board in 1996 and was named vice chairman of Saks in 2002), Sadove had a 25-year career in consumer marketing and products. He had been the president of Clairol, and was also in charge of the Bristol-Myers Squibb beauty care division when it was sold in May 2001 to Procter & Gamble for $5 billion.

“When I came into Saks, one of the things that I found was exactly what I found at Clairol,” he said. “It was what I called a vertical organization. Every decision went right up to the merchants and up through the store organization — you didn’t have collaboration cutting across. In transforming an organization from a vertical organization to a horizontal organization, we created multifunctional teams….It’s getting people on the same wavelength. If every decision is made at the top and if every decision is second-guessed, that creates a culture.”

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Instead, Sadove said, he chose to focus on innovation and people in an effort to create a “collaborative, teamwork-focused” culture.

“It’s about articulating a clear and compelling vision that everyone understands: Who do you want to be? What do you want to be when you grow up? And at Saks it was about being luxury but both at the high end and a more accessible luxury price point.”

It’s also about focusing on new ideas, he said. “What do you ask somebody when you walk down the hall and greet them? Is it ‘What are your numbers today?’ or is it ‘What are the new ideas that you have?’ It’s about what kind of an environment do you want people to be operating within.”

Developing leaders internally, at all levels, is critical, Sadove believes. “I have 30 of my high-potential people from all over the country coming for what I call a ceo summit. I’m spending a day and a half with them and we’re going to talk about leadership and we’re talking about having them work on some of the business problems that I face and my senior leadership team faces. We don’t believe that much about sending people off to executive programs — it’s the executives within the company that do the training. And finally you want winning. You want people who are high-performance and they’re focused on winning in the environment.”

Sadove not only wanted to attract those people, he wanted to retain them. “I often found that in many companies, they really don’t have real career growth discussions,” he said. “When someone is leaving out the door and they’re about to resign, then you have the career discussion — ‘Oh, I didn’t know that you really weren’t that happy or that you weren’t getting the growth opportunities’ — and then you put money on the table and you try to save them. This is all about how do you make sure that that doesn’t happen.” That means giving employees the compensation, learning experiences and the feeling that they can grow within the organization, he said. “Then, you get the results.”

When Sadove arrived, “within Saks, very few people at Saks Fifth Avenue had much equity and stake in the game because they were a division of an operating company, Saks Inc., that had profits in Carson Pirie Scott and Parisian,” he said. “So we put a fair amount of equity into the hands of the people. So you find a lot more equity in the managements and going on down into the organization than you had before. We changed a lot of the compensation measurements. In terms of incorporating some of these cultural issues into the performance management system — there was a time two and a half years ago that the only thing people were being measured on was inventory turn. You can turn all the inventory if you want — but if you don’t have any product in the store and you didn’t have enough inventory to sell then you weren’t going to get much in the way of results. So we changed some of the metrics to focus on top-line growth and gross margin dollars as well as gross margin percent and less about just inventory turn.”

Of course, running a successful business also includes focusing on your consumer, and merchandising in a way that makes sense to her, he said.

“What are you thinking about relative to the customer? Are you being focused on yourself, are you being focused on the products or are you being focused on what does the customer want?”

One thing she doesn’t want: an empty store. “I would walk into some stores, sometimes I found them half empty, but sometimes I found that there was no rhyme or reason in terms of what brand matrix [we would] have,” said Sadove. To turn that around, “we created a concept of good, better, best. Good being our entry price point, meaning bridge. And best being very high-end luxury. We asked every store and every merchandising category to look at it and say what do you want to be? What do you want to be down the road? And we identified a volume growth plan for every store and for every category.”

The solutions included focusing on core brands, having exclusive offerings and having key items, said Sadove. “[Before that] Saks didn’t really have a key item strategy,” he said. “For those people involved in more of a midtier department store mentality, that’s every day.”

Clearly, the changes worked. These days, Sadove said, the organization includes 54 Saks Fifth Avenue stores, 48 Off 5th outlet stores and a robust online business. “Last year, our revenues exceeded $3.2 billion; they’re probably pushing closer to the $3.5 to $4 billion annual rate right now,” he said, adding that the company has more than 16,000 employees. “If you look at the Saks numbers last year, for example, we grew about 12 percent in top-line growth. Our gross margins grew by about 50 basis points, our [selling, general and administrative expenses] improved by 70 basis points, our operating income doubled and our operating margin essentially doubled as well.

“This is a start,” Sadove continued. “This is a company that’s been a vast underperformer over many years. I look at some of our competitors, whether it’s a Neiman’s or even some of the Nordstrom’s or the Macy’s, their operating margin is substantially higher than Saks. And Saks has a long way to go. But what you’ve seen is if you focus on those metrics in terms of how you’re treating people, what kind of a culture do you have, what kind of innovation and ideas do you have, then you can see the supertanker starting to turn….We haven’t reported earnings, but we’ve certainly seen the top-line sales results for the first three months of this year. While the growth isn’t as good as we’ve seen in the past year — you’re still seeing positive momentum in a very tough economic environment.”

Even in the face of an increasingly tough economy, Sadove is determined to plow ahead. “In this environment you’re probably going to be able to chase product — so you don’t have to go too heavily in terms of overstocking inventory, but you’re going to have to have enough of the product to be able to catch the trends. The beauty industry by and large has a lot of replenishment product, and you’re not going to see a big swing in the inventory of the products that most of the people in this room are going to be dealing with. But when you’re dealing with fashion, in terms of some of the apparel, you’re gonna have to take a risk. The nature of this business is taking some risk.

“We’ve talked about Saks performing with midsingle-digit comps this year in the latter part of the year,” he continued. “If you have too little inventory, the stores are going to look empty, you’re not going to have the fashion, and you’re going to miss a ton of sales. You’re going to still see a tough economy out there over the next six months or so….I don’t think it’s going to get worse, but it’s certainly not getting a lot better in the near term.”